Cross Your T’s: Conducting Due Diligence

Buying or selling a business can be an exciting opportunity. With that excitement, many buyers and sellers skip due diligence entirely or cut corners. Failing to do due diligence can have serious consequences. When the excitement wears off, many buyers and sellers are left wondering what went wrong.

Most people buying a business look at the financial information. But many fail to conduct full due diligence and look at all parts of the business. Failing to look at the circumstances of the sale can be disastrous for both buyers and sellers. Buyers may discover they can’t operate the business at a profit or at all. Two particular areas of concern are: 1) Licenses and permits and 2) Liabilities.

Many businesses require licenses or permits in order to operate. Due diligence involves making sure the business you buy has those and that they can be transferred to you (for example, an Appleton permit won’t work if you plan to set up shop in Green Bay). The last thing you want is to go through the purchase process only to find that you can’t operate the business because you don’t have the necessary permit.

Another area to investigate is liabilities that might not show up in financial statements. For example, a business might be in violation of employment laws or facing environmental lawsuits. Depending on the liability and how the sale is structured, a buyer may be on the hook for those, leading to extra costs and cutting into profitability.

Sellers also face problems if due diligence isn’t completed. Depending on what warranties you make, omitting information might make them untrue. And untrue warranties lead to liability.

Buying or selling a business should be an opportunity for growth, not a hassle years down the road. Taking the time to do it right now can save you time later.

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